Optimal Trading in a Limit Order Book Using Linear Strategies

22 Pages Posted: 29 Oct 2011

See all articles by Paolo Pellizzari

Paolo Pellizzari

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: September 1, 2011

Abstract

We numerically determine the equilibrium trading strategies in a Continuous Double Auction (CDA). We consider heterogeneous and liquidity motivated agents, with private values and costs that trade sequentially in random order under time constraints and are not aware of the type of the other agents in their session. We assume that they submit limit orders using a simple linear function of the current best quotes (ask and bid). In equilibrium, found using an Evolution Strategies algorithm, impatient agents do not always submit market orders, as in other models of CDAs, and agents take into account both sides of the book in their optimal decision. Finally, we provide a description of the price and of the "small" set of states of the equilibrium book.

Keywords: continuous double auction, dynamic equilibrium, optimal trading strategies, evolution strategies

JEL Classification: D44, D82, C63, C72

Suggested Citation

Pellizzari, Paolo, Optimal Trading in a Limit Order Book Using Linear Strategies (September 1, 2011). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 16/WP/2011, Available at SSRN: https://ssrn.com/abstract=1950602 or http://dx.doi.org/10.2139/ssrn.1950602

Paolo Pellizzari (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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